South Kensington Summer 2014
Introduction Anyone who owns a property in London is a property investor. And it’s often useful to take an investor’s view of the market before making big decisions. To produce this report we’ve worked closely with the experts at D&G Asset Management, a company we co-founded in 2005. They invest in London residential property all the time – so are constantly analysing different areas, and assets within those areas, seeking to maximise returns.
Property Values
As well as publicly available sources, we’ve used proprietary data that we’ve been capturing since 1996, to help us make decisions and advise our clients. D&GAM has helped us focus on the data that counts, and we think the results make fascinating reading.
How an investor looks at the market Residential property investors use two key measures to assess property – the capital value and the net
Flats have had a positive start to the year.
Q1 performance and outlook Over the course of a full cycle, real annualised capital values normally rise in line with the real long term (10 year) trend. When, at a specific point in the cycle, real annualised growth is below the long term trend, rapid nominal growth is probable. Once the real annualised growth is aligned with the real long term trend, a pause is likely. Therefore, it’s possible to forecast which assets might have further to run and those that are likely to stall. Recent strong nominal growth in South Kensington must be viewed in the context of long term and real annualised growth rates since the start of this latest market cycle in 2007 (when property prices last peaked). In this cycle, one bedroom flats and three bedroom houses in South Kensington have now reverted to their long term trend. Two bedroom flats are getting close to their long term trend and have shown the strongest performance in Q1, a pattern that we expect to continue for the rest of the year.
Implications Owners of one bedroom flats and larger houses who are not looking to hold long term, or are considering a move to a different part of the UK, might find this is a good moment to sell.
Government Policy uncertainty remains for properties over £2m and is likely to be a further reason for stagnating capital growth rates. However, our view is that there is growing consensus amongst the political parties that higher taxation on residential property will be undertaken via a Council Tax solution. We suspect the extra levy on properties in the initial £2m-£4/5m will not be as bad as feared under
South Kensington Property Values Real Annualised Growth 10 year
This cycle
Nominal Growth Q1 2014
1 Bed Flat 3.00%
2.00%
5.51%
5.00%
3.00%
9.13%
8.00%
8.00%
5.00%
2 Bed Flat
3 Bed House
Source: D&G proprietary data, ONS
the original mansion tax proposal. We think it will be designed to encourage mainstream developers (Land Securities) in London and remove the risk of those “accidentally” living in properties at this level being forced into penury. We predict it will be the higher bands (£5m-£10m) and £10m+ properties that bear most of the load of the extra taxation. Although this is unlikely to be confirmed until closer to the May 2015 general election, we feel this makes properties in the £2m-£4m range likely to benefit most from the lifting of this policy uncertainty.
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rental yield (the annual rent, less expenses, divided by the property’s capital value). Both of these measures are important, and are influenced by a number of factors including: supply of new properties, infrastructure projects, demographics of the area, the economy (in particular, interest and tax rates) and the wider geopolitical picture. It’s the interplay of these factors that determines investment returns and makes property investment decisions so interesting.
The importance of market cycles Successful investors will always maintain a keen awareness of market cycles and long term trends. It is therefore important to look at the recent growth trends of capital and rental values in South Kensington when managing your property assets. We are recommending investors look at the year when property values last peaked (2007) and treat this as the start of the most recent cycle.
In Q1, rental values slowed, however indicators suggest a more positive end to the year. Q1 performance and outlook
Implications
Over the course of this lettings cycle, rents in South Kensington have risen across all unit sizes. For example, between 2003 and the end of 2013, nominal rents rose between 41% for one bedroom flats and 47% for two bedroom flats.
As the chart shows, in Q1 rents have been flat to slightly down across all unit sizes in South Kensington. Our view remains that rents have bottomed and will start to rise during this year. In order to benefit from stronger rental market conditions, landlords must continue to invest in their properties to ensure tenants stay and/or pay more rent. “Accidental landlords” who during 2008-2012 rented out properties rather than sell, and are not keen to invest capital into their properties, might choose to take advantage of a strong sales market and sell.
Rental values increased during the period of tight credit (2008-2012) as frustrated buyers were forced to rent. As credit has eased and confidence has returned so tenants have become owner/occupiers, leading to capital values rising and rents stabilising or even falling. This slowing down of rental growth has been evident during Q1 in South Kensington (see table below). Over the same period, employees/tenants experienced salaries stagnating in real terms meaning affordability was stretched. With earnings in the City now picking up and a general improvement in outlook, we believe that rents in South Kensington will start to rise.
South Kensington Nominal Rental Growth Dec 2003 - Dec 2013
1 Bed Flat
2 Bed Flat
3 Bed House
4 Bed House
41.43%
47.06%
43.89%
26.67%
Landlords must appreciate that those still opting to rent have more property to choose from and will be more demanding than a few years ago. Note: When renting out a property, investors will look at current rental yield, (see below) however they also need to take a view on how much rents will grow. It’s this “rental growth” that maintains real income and yield over time.
Q1 2014
0%
0%
-3.47%
0%
Source: D&G proprietary data
Current Rental Yields March 2014
One Bed Flats
2.5% – 3.7%
Two Bed Flats
2.2% – 3.5%
Three Bed Houses
2.2% – 3.2%
Four Bed Houses
2.2% – 3.2%
10 Yr UK Gilt Yield
2.7%
FTSE All Sh Yield
3.45%
UK Base Rate
0.5%
Rental Growth & Yield
Market Context
Never has the difference between London and regional property prices been so great. Every Spring we co-host the ‘Move to the Country Show’ with The London Office. The show is held in Battersea and gives our clients and members of the public an opportunity to meet local independent estate agents from across our UK network. The show is an important date in our calendar as every year a proportion of our vendors sell up and leave London.
Regional property prices relative to London property prices Average London Property Price
100%
75%
For many, the timing of that move involves a number of practical considerations such as schooling and space. For others, it is an important investment decision where a London property is sold and part of the money deployed into a regional retirement property. The remainder often forms part of a pension pot, so the timing of the move is crucial.
50%
25%
0%
Source: Office for National Statistics
South East
Although we remain positive about London prices over the long term, the current relative gap between London and regional property prices may well provide an opportunity for those looking to move out of London and top up their savings/pension pots.
South Kensington key facts & figures
South West
East Anglia
■ 1973 ■ 1983 ■ 1993 ■ 2003 ■ 2013 Source: ONS average property prices.
Nominal Capital Returns to Dec 2013
1 Bed Flats
Here are the key facts and figures anyone investing in the property market needs at their fingertips.
Nominal Rental Income Growth to Dec 2013
2013
5 years
10 years
10%
61%
81%
2 Bed Flats
15%
84%
131%
3 Bed Houses
13%
161%
200%
4 Bed Houses
14%
78%
167%
2013
5 years
10 years
8%
15%
30%
Other Assets Capital Returns to Dec 2013
2013
5 years
10 years
1 Bed Flats
4%
8%
41%
Nationwide HPI*
2 Bed Flats
0%
4%
47%
Halifax HPI*
6%
8%
22%
3 Bed Houses
8%
18%
44%
FTSE 100
14%
52%
51%
4 Bed Houses
14%
19%
27%
RPI
13%
19%
38%
*House Price Index
South Kensington 2014 Our view
•S ub-£2m to continue to be hottest market followed by sub-£4m •L arger units will require policy uncertainty to lift before growth continues • Rents to rise further from 2013 levels
Our South Kensington Offices 25-27 Harrington Road, London SW7 3EU 22 Gloucester Road, London SW7 4RB Sales Sophie Hayward T 020 7581 1152 E shayward@dng.co.uk
douglasandgordon.com
Lettings Katherine Ilett T 020 7589 5252 E kilett@dng.co.uk